57
58 an absolutely greater number of the very poor'. We used natural logarithm of number of employees (staff) as indicator of the size of the institutions, as it is generally done when talking about the size or dimension of an organization or institution. It might be that growing in size, MFIs at the same time expand their contacts and increase their network, having a greater access to information and having a better possibility to reach a greater number of clients. The third and more significant result of our research, and also the most innovative one, takes into consideration two different variables, ROA and ALB, and the relation between them. First, evidence shows that with the increase of ROA, institutions increase also their level of outreach.
Contrary to what was hypothesized, our analysis shows that the phenomenon of mission drift actually does not lead to an improvement in the financial performance of microfinance institutions, but on the contrary, it leads to a deterioration of the financial performance. This finding brings us to affirm that the first hypothesis is denied. An explanation of this result stems from the fact that microfinance institutions are moving from target the poorest (considered riskier) and are moving towards the less poor, in order to ask for a risk premium that is lower and to minimize transactions costs. But, evidence shows that transaction costs decreased only in part and not enough to result in a improvement in the financial performance (Roberts, 2013). Concretely, it is as if moving to the less poor, bring the institutions to reduce the interest rate more than the reduction of the transaction costs. In this regard, it may be suggested to analyze the dynamics of transaction costs and their progress in relation to changes in the poverty level of the clients. It could therefore be suggested that the relationship between interest rate and transaction costs in MFI is not linear . This could also explain the reason why earlier studies identified mixed results, suggesting that specific further studies must be
59 conducted to understand the nature of the relationship that exists between the two dimensions.
Concerning the second hypothesis, we can say that in cases where MFIs become more attentive to the financial performance, this does not necessarily comes at the expense of the level of outreach achieved. In the table (number of the table), the interaction (B15) shows that the positive effect of a search of financial performance compared to outreach is amplified by the average level of loans. This means that the search for financial performance is not compromised by the level of outreach, when microfinance institutions do not stray from their original social mission. The financial performance and outreach are correlated positively and not negatively as the second hypothesis sustained and which now turns out to be false. So, where MFIs do not fall into the mission drift pursuing good financial performance, they will also have a higher level of outreach achieved. When, on the contrary, microfinance institutions incur in mission drift, there is a negative effect on their level of outreach. Therefore, MFIs moving away from the social mission lead to failure in the attempt to promote the overcoming of the weak economic situation of the poor.
The reduction of ALB corresponds to a growth of the level of outreach. This result confirms the third and last hypothesis. It is true that moving from their original mission MFIs reduce their level of outreach, that is to say that when MFIs offer higher average loans, the level of outreach decreases, while if the ALB is low the outreach will be higher. Therefore, the relationship between mission drift and outreach is verified.
In addition the interaction between these variables demonstrates that if the level of ROA grows and, simultaneously, the level of ALB decreases, the level of outreach will be higher. The analysis of the trade-off between financial sustainability and
60 outreach in many different cases has highlighted a negative relationship (Woller, Dunford and Woodwoth, 1999; Paxton, Graham and Thraen, 2000; Woller, 2002;
Olivares-Polanco, 2004; Hermes, Lensink and Meesters, 2011). Indeed, our research points out that it could be a positive one, in the case that MFIs decide to lower the size of the average loans. In this way it can be said that the trade-off is mitigated by the size of the loans. Reducing the average loan, the profitability of MFIs turns out to be higher as well as the level of outreach. According to this, we are able to assert that the phenomenon of mission drift does not occur and that it is not true that focusing on the financial performance will reduce the level of outreach. Mission drift instead occurs when MFIs provide high loans. To prevent the risk of mission drift MFIs should give small loans and go back to their origin. By doing this, they would avoid mission drift and would allow analyzing the positive relation between financial performance and outreach.
There are several practical implications deriving from our findings, at least at three different levels: for the management of the MFIs, for those who rate the MFIs and consequently also for the potential investors and donors, and finally for the academic research.
The first implies that MFIs should grow their dimension, in terms of number of employees and clients served, but not in terms of bigger loans, rather they pursue growth objective by keeping the size of the loans low. It is in this way that poor will be reached, and so the level of outreach increases. Secondly, rating agencies should take in consideration the ALB indicator and its value, which is fundamental to address whether the mission drift occurs or not. The importance of this indicator is already recognized by the academics and researchers on the subject of mission drift, but not yet, or not so
61 intensively by rating agencies. Therefore, the evaluation of the MFIs should consider low ALB as a good indicator to reach both profitability and outreach. Finally findings show that the trade-off is influenced by the way in which MFIs provide loans, meaning that it is advisable to include in the way of distributing loans the size of ALB as a relevant predictor. The relevant result, which brings a new contribute to the literature on this subject, is that the more the MFIs focus their attention on the outreach, the more their profitability grows. This implies that it is advisable for MFIs to go back to the origins of their existence: maximize the outreach in order to reduce poverty, and through this, increase the profitability.